News Column

Fitch Affirms Pearland ISD, TX's GO Bonds at 'AA'; Outlook Stable

February 26, 2014

Fitch Ratings affirms its 'AA' rating on the following Pearland Independent School District, Texas unlimited tax (ULT) bonds:

--$238.2 million ULT bonds.

In a release on February 21, Fitch noted that the Rating Outlook is Stable.


The bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district. The bonds are additionally secured by the Texas Permanent School Fund, whose bond guarantee program is rated 'AAA' by Fitch.

Key Rating Drivers

Sound Financial Performance: Management's conservative budget practices result in typically positive financial performance. The district maintains sound liquidity and reserves.

Diverse Regional Economy: The district benefits from its close proximity to the strong and diverse Houston metropolitan statistical area (MSA). Wealth levels are above average and unemployment is low.

Maturing District with Stable Growth: Previously rapid population growth has slowed as the district approaches build-out. Tax base gains have been steady.

High Debt Levels: The debt profile is characterized by high overall debt levels and moderately slow amortization.

Rating Sensitivities

Strong Fundamentals: Fitch expects the district to retain its strong financial position to counterbalance concerns over the high overall debt level.

Credit Profile

Pearland ISD is located just south of Houston's outer loop, mostly in Brazoria County. The district experienced high population growth before 2010 which has moderated in recent years, resulting in a 2013 population of 96,547.

Management Practices Support Healthy Financial Profile

The district maintains a sound financial profile with general fund reserve levels in excess of its formal fund balance policy. The district's policy is to maintain reserves equivalent to three months (25 percent) of expenditures, which Fitch views as prudent. Audited results for fiscal 2012 reflect a surplus of $4.5 million in contrast to a budgeted $5.4 million operating deficit. Liquidity was strong at over three months of spending.

The audited 2013 financials covered 10 months due to a change in fiscal year end, during which the district took advantage of favorable budget performance for non-recurring capital expenditures. Operating results still exceeded budget for an audited surplus of $4.3 million, resulting in a healthy unrestricted general fund balance of $42 million, 35 percent of spending.

The district is expected to outperform its budgeted $8 million drawdown for fiscal 2014, closing the year with break-even results due to revenue overperformance as a result of conservative enrollment estimates.

Residential Community with Access to Houston MSA

The district is located in a rapidly growing residential and commercial area of the Houston MSA, with access to major transportation arteries and the nearby Houston medical complex. The City of Pearland (GO bonds rated 'AA' by Fitch) is located partially within the district, and has experienced strong employment growth over the past decade. The city's unemployment rate of 4.3 percent for November 2013 is well below state and national averages. District wealth and educational attainment are notably high in comparison with the region, state, and nation.

TAV growth occurred at a compound annual rate of 0.6 percent over the past five fiscal years, holding stable through the recession. Fitch believes that management's projections for 1 percent-3 percent increases over the near term are reasonable considering some residential and commercial development underway.

Enrollment trends have slowed in tandem with TAV, and the district's external demographer projects that the district will reach build-out around 2023-2024. District schools have sufficient capacity in excess of projected enrollment at build-out.

Elevated Debt Ratios; Other Long-Term Liabilities Manageable

The district's overall debt burden of $658 million is a high 9.9 percent of market value, driven by overlapping city and municipal utility district (MUD) debt. Debt service comprised a moderate 13 percent of governmental spending in 2012 after factoring in state support for debt service. The amortization rate is below average at 42 percent over the next 10 years.

Fitch expects that results of a 2013-2014 facilities study will inform the district's preparation of a capital improvement plan. The district maintains $35 million in bonds authorized but unissued, and has no plans to seek additional authorization in the near term.

Retiree pension benefits are provided through the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer plan. The district's annual contribution to TRS is determined by state law; the district consistently funds that contribution. District employees contribute to TRS for pensions at 6.4 percent of annual payroll, and the state pays the local district's contributions (6.4 percent of payroll in fiscal 2013), with the exception of district contributions for probationary employees and for benefits on employees' salaries that exceed the TRS statutory minimum. Total pension contributions made by the district in fiscal 2013 totaled less than 1 percent of governmental fund expenditures.

TRS is adequately funded at 81.9 percent as of August 31, 2012, though Fitch estimates the funded position to be lower at 73.8 percent when a more conservative 7 percent return assumption is used. The state's payment of district pension costs is an important credit strength as it keeps overall carrying costs manageable in the face of a high and growing debt burden. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled a moderate 13 percent of governmental fund spending in fiscal 2012, largely reflective of state support. Starting in fiscal year 2015, pension contributions for all districts in the state will rise to 1.5 percent on the statutory minimum portion of payroll, from zero, increasing carrying costs further. Increases in district funding requirements beyond fiscal 2015 could create additional budget pressure, which Fitch will monitor.

Texas School District Litigation

In February 2013 a district judge ruled that the state's school finance system was unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75 percent of Texas school children, found the system 'inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels...' The judge also cited inadequate funding as a constitutional flaw in the current system.

The judge reopened the lawsuit in June 2013 after state legislative action that partially restored state funding levels and made other program changes. The trial began last month (January 2014). If the state school finance system is ultimately found unconstitutional, the legislature will be directed to make changes to the system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools a positive credit consideration.

Additional information is available at ''.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, IHS Global Insight, and the Municipal Advisory Council of Texas.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (August 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (August 14, 2012).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status solicitation?pr_id=821231

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